Can I do this - Savings vs Pension

[paulrockliffe]

I'm in a position of paying of receiving a lot of my 'income' in non-taxable benefits, my take home pay is low, but my expenses are very low. I also have sizeable savings and no pension.

Can I setup a pension for myself such that everything I earn above the tax threshold is paid tax-free into a pension scheme, then I top-up my wage from my savings. In effect my income would stay the same, but I would be transferring savings into a pension. The benefit is that I would be able to pay an extra £120 or so into the pension each month as the pensions contributions could be before-tax.

Or am I missing something?

Thanks

[sinizter]

Pension payments are upto a maximum or 200k-something or your total pay - whichever is lower.

So I don't think so.

I might be mistaken, but someone else will be along to correct me.

[sinizter]

DirectGov said:

Limits on tax relief

You can save as much as you like into any number and type of registered pension schemes and get tax relief on contributions of up to 100 per cent of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. But the amount you save each year toward a pension is subject to an 'annual allowance'.

For the tax year 2010-11 the annual allowance is £255,000 and for the 2009-10 tax year it was £245,000. You pay tax at 40 per cent on any contributions you make that are above the annual allowance.

From http://www.direct.gov.uk/en/Pensionsandretirementp...

Edited by sinizter on Thursday 23 September 22:30

[paulrockliffe]

At the moment my income after Tax is £9k, I can easily drop this to the £6.5k earnings threshold and (if required)top-up from savings. The £2.5k difference is less than interest earned on savings.

I've done a spreadsheet, off the top of my head that would mean a monthly pension contribution of £240 from me, but I'd also be able to pay the £120 tax I normally pay into the pension too, so a 50% increase in contribution, by rearranging my finances a bit.

Bearing in mind those numbers, it seems daft not to take advantage, but I feel like I'm missing something?

Actually, is there a lower earnings threshold for National Insurance that would mean I was still paying some NI?

[paulrockliffe]

musclecarmad said:

you can pay the full £9k into a pension and get 20% tax relief whether it comes from your savings or income.

NI doesn't come into consideration.

Ok, sounds good. Obviously I only need to pay in the £2.5k or so to get to a point where all my tax is, in effect, being paid into a pension instead.

What do you mean when you say, "whether it comes from your savings or income"? Do you mean I could make the contribution straight from my savings and then not pay tax on my income? There is no tax associated with my savings, other than tax on the interest.

Cheers

[ringram]

There is a limit at present of £20k unless you have a regular payment history. This is to stop people bunging large amounts in to avoid tax.
So you cant pay £200k or whatever in with full tax relief. That option is now history... unless you have an established regular payment history prior to the introduction of this new limit.

Details on HMRC site for those interested.

[paulrockliffe]

Yeah, I don't think that post was for my benefit though.

Downside is the erosion of savings, which I may need to buy a house with or something at some point when work kick me out. But I guess that's more than countered by my need for a pension?

[paulrockliffe]

Yeah, thanks that's sort of what I was thinking. It just makes sense with the numbers I've outlined to use the pension contribution to make things more tax-efficient for myself. I wasn't considering doing more than reducing my wage to the lower earnings threshold, so would still be balanced.